Bank: FAYSAL BANK LIMITED - Analysis of Financial Statements - Financial Year 2006 - Financial Year 2010
Faysal Bank started operations in Pakistan in 1987, first as a branch set-up of Faysal Islamic Bank of Bahrain and then in 1995 as a locally incorporated Pakistani bank under the present name of Faysal Bank.
On January 1, 2002, Al Faysal Investment Bank Limited, another group entity in Pakistan, merged into Faysal Bank, which resulted in a larger, stronger and much more versatile institution. The bank has a network of 226 branches, including 13 Islamic banking branches.
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COMPANY SNAPSHOT
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Name of company Faysal Bank Limited
Nature of Business Banking
Ticker FABL
Profit After Taxation FY '10 Rs.1,190,329,000
Profit After Taxation FY'09 Rs.1,200,159,000
Share price (avg. over Jan'10-Dec'10) Rs.15.92 per share
Market Capitalization as on 31st December 2011 Rs.11,636,077,650
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The bank acquired the majority shareholding of 99.37% of the RBS for cash consideration of approximately euro 41 million on the acquisition date of October 15, 2010 and the RBS became a subsidiary of the bank as at the aforementioned date.
The strength and stability of Faysal Bank Limited is evident through the Credit Rating of "AA" (Double A) for long to medium-term and "A-1+" (A One Plus) for short-term assigned to it by both JCR-VIS Credit Rating Company Limited and Pakistan Credit Rating Agency Limited (PACRA). During FY10, the bank acquired controlling interest of Pakistan operations of the Royal Bank of Scotland (RBS Pakistan).
The majority shareholding of Faysal Bank is held by Ithmaar Bank B.S.C an investment bank listed in Bahrain which directly and indirectly holds 66.94% of the shareholding of the bank, with the balance shares in the hands of general public, NIT and other Pakistani institutions.
Faysal Bank holds a 60% shareholding in its subsidiary, Faysal Management Services (Pvt.) Ltd. During FY10, the Board of Directors of FMSL decided to voluntary wind up the company and accordingly resolved to initiate proceedings of voluntary wind up by the members of FMSL under the Companies Ordinance 1984.
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RECENT PERFORMANCE
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Rupees in 000's 2009 2010 % Change
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Profit and Loss Statement
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Mark-up/return/interest earned 16,957,875 19,710,460 16.23
Mark-up/return/interest expensed 11,967,885 13,919,256 16.31
Net mark-up/interest income 4,989,990 5,791,204 16.06
Provision against non-performing loans and advances 1,966,414 1,906,379 -3.05
Provision for consumer loans - general -26,723 -89,730 235.78
Provision / (Reversal) for
diminution in the value of investments 252,192 287,255 13.90
Bad debts written off directly - 97,920 -
Total provisions 2,191,883 2,201,824 0.45
Net mark-up / interest income after provisions 2,798,107 3,589,380 28.28
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Non mark-up / interest income
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Fee, commission and brokerage income 885,124 1,140,802 28.89
Dividend income 667,926 334,885 -49.86
Income from dealing in foreign currencies 400,477 518,618 29.50
Gain/Loss on sale of securities 824,621 1,339,817 62.48
Unrealised gain/loss on revaluation of investments -45,674 67,967 -248.81
Other income 80,591 610,249 657.22
Total non mark-up / interest income 2,813,065 4,012,338 42.63
Total mark-up and non-markup income 5,611,172 7,601,718 35.47
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Non mark-up / interest expenses
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Administrative expenses 4,284,086 6,644,072 55.09
Other provisions -6,444 61,777 -1058.67
Other charges 33,029 68,815 108.35
Total non-markup/interest expenses 4,310,671 6,774,664 57.16
Profit before taxation 1,300,501 827,054 -36.40
Taxation 100,342 -363,275 -462.04
Profit after taxation 1,200,159 1,190,329 -0.82
Basic and diluted earnings per share- Rupees 1.64 1.63 -0.61
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RECENT PERFORMANCE
During FY10, mark-up increased by 16.23% from Rs 16.96 billion in FY09 to Rs. 19.71 billion in FY10. This increase was driven by a 52.87% increase in investments from Rs. 56.53 billion in FY09 to Rs. 86.42 billion in FY10, and 46.37% increase in advances from Rs. 91.35 billion in FY09 to Rs. 133.71 billion in FY10. Faysal Bank withdrew all its lendings to financial institutions (call money placements and repurchase agreements), ie did not participate in interbank lending market. Thus lendings to financial institutions fell from Rs. 15.02 billion in FY09 to nil in FY10. This represents an opportunity cost incurred by Faysal Bank, since participation in the interbank market could have proved profitable, in line with the increase in KIBOR towards the end of FY10, as depicted below.
However, industry average mark-up earned of the 5 major banks (NBP, HBL, MCB, UBL, and ABL) over FY10 was 6.67%. At first glance Faysal Bank seems to demonstrate high profitability, especially after its merger with RBS and the resulting access to more, high net worth customers. However, the increase in mark-up earned was offset by increase of 16.31% in mark-up expensed from Rs. 11.97 billion in FY09 to Rs. 13.92 billion in FY10. This was due to a 52.14% increase in savings accounts and 100% increase in remunerative current accounts, though financial institutions remunerative deposits fell by 27.90%. The industry average for mark-up expensed was 3.57%, thus it goes to show that Faysal Bank was not effective in managing its expenses.
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Rupees in 000s 2009 2010 % Change
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Customers- Fixed deposits 53,096,526 86,153,050 62.26
Customers - Savings Account 40,443,955 61,531,285 52.14
Customers - Current Account Remunerative 29,471 100.00
Customers - Current Account Non-Remunerative 21,147,284 39,670,673 87.59
Fin. Inst - Remunerative deposits 7,223,895 5,208,242 -27.90
Fin Inst - Non-Remunerative deposits 9,782 317,422 3144.96
Net deposits 123,655,188 195,315,204 57.95
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Net mark-up income increased by 16.06% and coupled with a 3.05% decrease in provisions against NPLs due to improvement in FSV benefit from 30% to 40%. This led to an overall 28.28% increase in net markup income after provisions from Rs. 2.80 billion in FY09 to Rs. 3.59 billion in FY10.
Long-term advances increased from Rs. 37.15 billion in FY09 to Rs. 68.84 billion in FY10, whereas short-term advances increased from Rs. 61.24 billion in FY09 to Rs. 82.33 billion in FY10. The point to note is that apart from FY08, short-term advances have always been greater than long-term advances, demonstrating a general reluctance of Pakistani banks to commit funds in the long-term.
The CASA ratio (Current and Saving deposits to Total deposits) showed improved from 49.81% in FY09 to 51.83% in FY10. Yet it is still not even near to what some big players in the industry have with MCB and UBL leading the lot with CASA ratios as high as 83% and 76% respectively which allow them to operate very cost effectively. The ratio is also well below the industry average of 69%.
FBL's non-interest income, which grew by 42.63% from Rs. 2.81 billion in FY09 to Rs. 4.01 billion in FY10, represents 52.78% of the total income of the bank. This increase was driven by 28.89% increase in fee, commission and brokerage income, 29.50% increase in income in dealing in foreign currencies, 62.48% increase in gain/loss on sale of securities. The large increase in gain on sale of securities was on account of gain in settlement of NIT LOC units. However, dividend income declined by 49.86% in FY10.
Non-interest expenses also chipped in to reduce the bank's profits, increasing by 57.16% from Rs. 4.31 billion in FY09 to Rs. 6.77 billion in FY10, offsetting the 35.47% increase in total mark-up/non-mark-up income. This was mainly driven by a 55.09% increase in administrative expenses. Fifty percent of the increase in non-interest expenses was due to Faysal Bank's post-acquisition share of RBS' administrative expenses, and the rest 50% was due to increased HR and branch operations costs.
This led to a 36.40% decrease in profit before taxation, from Rs. 1300 million in FY09 to Rs. 827 million in FY10. However, a 462% decrease in taxation of 462% saved the profitability of Faysal Bank, since only a 0.82% decrease in profit after taxation was observed from Rs. 2100 million in FY09 to Rs. 1190 million in FY10. The earnings per share witnessed a corresponding decrease of 0.61% from Rs. 1.64 per share in FY09 to Rs. 1.63 per share in FY10. Profit was also driven down due to Faysal Bank's post acquisition share of RBS' profit and loss for two and a half months, effective from October 16, 2010.
BANKING SECTOR PERFORMANCE:
The decline in the inflation during the starting months of CY10 and an improvement in the macroeconomic situation allowed the SBP to ease its monetary policy. However, the growing fiscal deficit and low external receipts and a fear of relapsing into macroeconomic instability, the SBP decided to increase the policy rate in July and September 2010.
Foreign exchange reserves increased by $4.325 billion to an all-time high of $.16.750 billion which were at $12.425 billion at the close of FY09. SBP's decision to increase banks' Foreign Exchange Exposure Limit also strengthened the market's capacity to handle larger volumes of foreign exchange transactions without additional volatility in the exchange rate.
After the acquisition with RBS, Faysal Bank achieved the status of one of the top ten banks of Pakistan in terms of its asset base. Comparison with 'industry' figures in this section is based on the performance of the five top banks (NBP, HBL, MCB, UBL, and ABL) which possess over 50% of the asset base market share. The mid-size banks, ie banks 6-10, of which Faysal Bank is one, capture approximately 22% of the market share.
Being the oldest banks in Pakistan and having the most extensive branch networks, the top five banks enjoy the bulk of the low cost current and savings deposits which makes deposit mobilisation easy for them and enables them to earn banking spreads up to 10%. On the other hand, the mid-size banks are reluctant to raise their deposit rates (in order to attract deposits), since this leads to a decline in their profitability, since their spread is already lower at up to 5%.
Thus the banking sector performance comparison is only indicative, based on the benchmark performance of the top five banks.
Banking sector performance in FY10 improved compared to FY09. It was mainly characterised by increasing trend in NPLs as slowdown in economic growth took a toll on the performance of enterprises. However, some respite was offered by the FSV benefit on the provisions against NPLs, which was increased by the SBP from 30% to 40% in October 2009. NPLs growth registered a downward trend, falling from 19.04% to 10.76% in the industry. This trend was also reflected in Faysal Bank's provisions against NPLs, which increased by 25.97% over FY08-FY09, but decreased by 3.05% over FY09-FY10.
However, the actual NPLs growth of Faysal Bank increased exorbitantly from 42.67% in FY09 to 131.54% in FY10. This was due to the acquisition of RBS' infected loan portfolio. The NPLs growth for the industry was from 19.04% in FY09 to 10.76% in FY10.
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FABL Industry
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2009 2010 2009 2010
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Net Interest Income (growth %) 0.82% 16.06% 19.32% 8.20%
Deposits (growth %) 20.31% 57.95% 10.78% 13.08%
Advances (growth %) 1.77% 46.37% 3.72% 0.90%
% of Deposits in CASA 49.81% 51.83% 67.19% 69.49%
NPLs (growth %) 42.67% 131.54% 19.04% 10.76%
Investments (growth %) 87.28% 52.89% 38.42% 35.12%
Profit After Taxation (growth %) 7.64% -0.82% 17.56% 14.93%
Earning Asset Ratio 90.06% 82.34% 80.25% 81.25%
Return on Deposits 0.97% 0.61% 3.09% 3.26%
Return On Equity 9.39% 7.21% 22.06% 23.90%
Price/Earnings Multiple 10.69 9.77 7.71 7.54
Capital Adequacy Ratio 11.93% 9.95% 14.75% 16.39%
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The industry generally experienced a decline in growth of net interest income from 19.32% in FY09 to 8.20% in FY10. However, FABL's net interest income growth increased from 0.82% to 16.06%, and stayed well above the industry average of 8.20%, thus indicating FABL's ability to beat the market despite downward market trend. According to SBP review, the declining spread between the return on advances and the return on deposits (as shown in the graph below), coupled with the overall decline in advances growth as well as the tendency of banks to invest in low-return, risk-averse assets, resulted in a negative impact on net interest income and profitability of the banking system.
Faysal Banks's profit after tax growth decreased significantly from 7.64% to -0.82% due to the Rs. 8.38 million loss acquired in the RBS merger, whereas the trend observed in the industry was a slighter decline in growth from 17.56% to 14.93%. Faysal Bank's earning asset ratio also increased from 90.06% to 82.34% due to divestiture of all of the lendings to financial institutions, showing a decreasing generating capability at the bank. However, the earnings asset ratio in FY10 was still higher than the industry average of 81.25%.
Return on deposits showed a decreasing trend at Faysal Bank, from 0.97% in FY09 to 0.61% in FY10, whereas the industry return on deposits increased from 3.09% to 3.26%. This was due to loss in profitability post-acquisition, though it indicates required improvements in generation of returns. For the same reasons, Faysal Bank's return on equity decreased from 9.39% to 7.21%, whereas the industry showed a positive trend from 22.06% to 23.90%.
Faysal Bank's growth in deposits increased significantly from 20.31% to 57.95% due to the post acquisition scenario, whereas the industry witnessed a growth in deposits from 10.78% to 13.08% over FY09-10. These additional deposits occurred across the board, ie customers' current (remunerative and non-remunerative), savings and fixed deposits; however, financial institutions' remunerative deposits decreased.
There was a positive trend in the growth of CASA accounts in both Faysal Bank, from 49.81% to 51.83%, and the industry, from 67.19% to 69.49%. This shows that the banking sector is moving towards cheaper sources of financing.
Faysal Bank's growth in advances also improved significantly due to the accumulation of RBS advances, from 1.77% in FY09 to 46.37% in FY10. However, industry wide, there was a decline in advances growth from 3.72% to 0.90%. According to SBP banking review, the unfavourable macro environment characterised by floods, power shortages, security concerns and higher inflation resulted in decreasing payback capacity of the private sector enterprises, especially SMEs, resulting in shift of banks' asset mix towards credit to the public sector, eg government paper and bonds of PSEs, and commodity operations financing. In the private sector financing, top rated corporate borrowers were granted most loans, as they are more resilient to economic slowdown and a fragile business environment.
Industry wide, investment growth declined slightly from 38.42% to 35.12% due to rejection of all the bids for PIBs auctions during the third quarter of FY'10. Likewise, Faysal Bank witnessed a fall in investment growth from 87.28% to 52.89%.
Faysal Bank's average share price fell from Rs. 17.53 per share in FY09 to Rs. 15.92 per share in FY10. This caused the price earnings multiple to fall from 10.69 to 9.77. Industry wide, the price earnings multiple witnessed a slight decline from 7.71 to 7.54. The industry average EPS for FY10 was Rs. 13.75 per share, mainly driven by MCB's EPS of Rs. 22.20 per share. Compared to this, Faysal Bank's EPS was Rs. 1.63 per share in FY10.
Faysal Bank's capital adequacy ratio decreased from 11.93% to 9.95%, due to the greater increase in risk weighted assets from Rs. 104 billion in FY09 to Rs. 180 billion in FY10. This was due to the increased credit, market and operational risk associated with the initial stages of the acquisition, whereas the increase in eligible regulatory capital held was lesser, from Rs. 12.40 billion in FY09 to Rs. 17.90 billion in FY10. This shows the need for activation of the necessary regulatory mechanism of the bank, in order to restore the CAR to 10%, as required by the SBP.
On the other hand, the industry experienced an increase in the capital adequacy ratio from 14.75% to 16.39%. CAR improved due to declining RWA to total assets, as shown in the graph below, which shows decreasing risk appetite of the banks.
STOCK PERFORMANCE:
Beta analysis generates the beta of FABL stock to be 1.41 against a (KSE-100) market beta of 1.00, as given by the slope of the trend line. This shows that FABL stock more risky than the market, and experiences high price fluctuations which also provide high returns on the stock price. A great extent of scatter is observed on the plot, showing that investor confidence in FABL wavers between highs and lows.
Stock returns volatility of weekly continuously compounded returns, shows that the standard deviation of these stock returns is 5.93%. The future stock returns are expected to vary with a standard deviation of 5.93%, indicating projected volatility of stock returns.
FINANCIAL PERFORMANCE (FY06-10)
The difficult macroeconomic environment of the last 2 years had an equally negative impact on Faysal Bank as it had for the industry as a whole. The profits after tax registered a slight decline of 0.82% over FY09-10, from Rs. 1200 million to Rs. 1190 million.
EARNINGS RATIOS
Return on assets decreased from 0.66 in FY09 to 0.45 in FY10, due to the lower income realised post acquisition (RBS losses were transferred to Faysal Bank) as well as the increase in assets from Rs. 180.87 billion in FY09 to Rs. 267.32 billion in FY10. For the same reason, return on equity also decreased from 9.39 to 7.21, as the total equity increased from Rs. 12.78 billion in FY09 to Rs. 16.52 billion in FY10. The return on deposits also dropped from 0.97 to 0.61 corresponding with an increase in deposits from Rs. 123.66 billion in FY09 to Rs. 195.32 billion in FY10. All these ratios point towards a deteriorating bottom-line performance of Faysal Bank, with a need to increase income and limit losses in the future.
The advances increased from Rs. 91.35 billion in FY09 to Rs. 133.71 billion in FY10 after the acquisition. The deposits showed a similar significant increase from Rs. 123.66 billion to Rs. 195.32 billion over FY09-10. Investments increased from Rs. 56.53 billion in FY09 to Rs. 86.52 billion in FY10. Borrowings from financial institutions remained almost constant as shown.
The major change observed in the earnings assets composition was the complete elimination of lendings to financial institutions. Tying up of funds in the advances and investments portfolio could have contributed to this change. It indicates decreased earning power of Faysal Bank as a major asset has been divested.
ASSET QUALITY
The non-performing loans increased significantly from Rs. 10.67 billion in FY09 to Rs. 24.71 billion in FY10, due to the additional NPLs of RBS incorporated into Faysal Bank's accounts and the various macroeconomic factors contributing towards rising NPLs, such as the floods. The NPLs to advances ratio also increased from 11.68 in FY09 to 18.48 in FY10, providing further proof of the deteriorating NPLs scenario, as more loans are now classified as non-performing, out of the existing loan portfolio as well as the new loans being extended. However, the provisions to NPLs ratio declined from 18.43 in FY09 to 7.72 in FY10, as the State Bank provided relief to the banking sector by increasing the FSV benefit from 40% to 50%.
MARKET VALUE RATIOS
The average prices as quoted in the Karachi Stock Exchange reflected the bank's drop in profitability expectations. The price fell from Rs. 74.10 per share in FY05, to a low of Rs 11.51 per share in FY08 and stabilizing to Rs. 15.92 per share in FY10. The price earnings ratio demonstrated a similar trend from 11.37 in FY06 to a low of 5.45 in FY08 and partially recovering to 9.77 in FY10.
DEBT MANAGEMENT
The debt to asset ratio increased slightly from 92.93 in FY09 to 93.82 in FY10. While the deposit times capital ratio increased from 9.67 in FY09 to 11.82 in FY10, due to a greater increase in deposits during the acquisition, as compared to the increase in equity. The capital adequacy ratio fell from 11.93 in FY09 to 9.95 in FY10, which indicates a required increase in Tier I and Tier II capital, in order to bring it in conformance with the 10% requirement set by the SBP.
The earnings assets to assets ratio declined significantly from 90.06 in FY'09 to 82.34 in FY'10 due to the elimination of the asset category, lendings to financial institutions. This reduced the bank's source of earnings. The yield on earning assets correspondingly decreased from 2.21 in FY09 to 1.08 in FY10. The advances to deposits ratio decreased from 73.87 in FY09 to 68.46 in FY10, showing that the bank does not endorse a policy favouring advances, and that more deposits than advances were obtained during the acquisition. The cost of funding decreased significantly from 22.04 in FY09 to 12.65 in FY10, showing that the bank is following the right policy of obtaining funds through low cost sources, ie demand deposits.
The equity to assets ratio declined from 7.07 to 6.18 over FY09-10, as there was an increase in assets from Rs. 180.67 billion to Rs. 267.32 billion in the RBS acquisition, whereas the increase in equity was smaller from Rs. 12.78 billion to Rs. 16.52 billion. The equity to deposits ratio similarly fell from 10.34 in FY09 to 8.46 in FY10, as a result of the increase in deposits from Rs. 123.66 billion to Rs. 195.32 billion. The earning assets to deposits ratio declined from 1.32 in FY09 to 1.13 in FY10, due to the coupled reasons of decrease in earning assets (lendings to financial institutions were reduced to nil), and the sharp increase in deposits post acquisition.
FUTURE OUTLOOK
As against the world-wide trend of low interest rates even zero-rated, Pakistan continued to follow stance of tightening of the monetary policy using the high interest rate as a tool to contain inflationary pressures at the cost of stalled economic activities. It can be noted that SBP already charging lower mark-up rate from exporters against export refinance facility under EFS in order to enable them to become competitive in the international market. The trade and industry however feels in order to ignite a spark in the dull and dreary economic conditions and to come out of the persisting recession the incentive of low interest should have been given to all stakeholders across the board to achieve the desired results.
Some market expectations were that current discount rate at 15% is too high and we recently saw a reduction of 100 basis points. In fact the cut in the interest rate was long overdue as done by other economies elsewhere as well as in the face of stability returned into macro situation under the IMF's Stand-By Arrangement.
The massive floods have also wreaked havoc on the country. The rising NPLs also pose a threat to our banking system.
The graph indicates the market expectations that the profitability of Faysal Bank is doubtful. The bank has yet to prove the synergies obtained from the acquisition so that it can regain market confidence.
COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
DISCLAIMER: No reliance should be placed on the [above information] by any one for making any financial, investment and business decision. The [above information] is general in nature and has not been prepared for any specific decision making process. [The newspaper] has not independently verified all of the [above information] and has relied on sources that have been deemed reliable in the past. Accordingly, the newspaper or any its staff or sources of information do not bear any liability or responsibility of any consequences for decisions or actions based on the [above information].
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